Intel's 3D Chip Challenge

Last week, Intel (Nasdaq: INTC) said it made the biggest breakthrough in microprocessor design in recent history. It called its new chip the most significant advance since the 1950's silicon transistor.

The company expects to begin production later this year, using a revolutionary 3D technology it has worked on for nearly a decade. With these strides, Intel claims to be three years ahead of the competition.

Regardless, the move is a significant one.

Microchip transistors, the building blocks of electronics, are always produced in flat structures. But Intel's breakthrough involves more complex, 3D models with circuit widths of 22 nanometers.

Most industry insiders see this push as Intel's attempt to fend off a major challenge from U.K. chip designer Arm Holdings (Nasdaq: ARMH). And they're mixed on whether it'll be a serious game changer in the end.

Intel's Dominance Challenged

Intel holds a dominant 80.8 percent share of the PC processor market. According to research firm IDC, its closest competitor, Advanced Micro Devices (NYSE: AMD), has only 18.9 percent.

But Intel's x86 chip architecture eats too much energy for today's new tech devices. It failed to create more power-efficient models for high-growth sectors such as mobile phones and tablet computers.

Arm Holdings, on the other hand, knows exactly how to take hold of that market. That shows in how Apple (Nasdaq: AAPL) iPhones and iPads use its designs.

Investors recognize Intel's shortcomings in this regard, causing the stock to lag over the past few years. It trades at just 10 times earnings, despite strong revenue growth rates.

But Intel worries even more about Arm's move into the PC market. IDC predicts that more than 13 percent of PC processors will be based on Arm's architecture by 2015.

This new 3D chip design might change the game though, as it cuts power consumption in half. Intel can now potentially challenge Arm in its predominant market of mobile phones and tablet computers.

No Easy Road for Intel

This news has some on Wall Street very bullish about Intel all of a sudden.

Take Lee Simpson, a Semiconductor Analyst at Jeffries. He sees major customers like Apple rethinking their chip choices in the near future.

That's not to say that Arm will simply stand back and let that happen, though. Not to mention that Intel's new chips might not be good enough in the first place.

Roger Kay, an Analyst at Endpoint Technologies, definitely doesn't expect them to compete. He predicts that Intel's chips "will certainly not be enough reason to uproot the established architecture."

And Richard Doherty at Envisioneering said the announcement "got a little bit more fanfare than it deserved."

Taiwan Semiconductor Manufacturing (NYSE: TSM), a pivotal manufacturer for Intel rivals including QUALCOMM Inc. (Nasdaq: QCOM) and NVIDIA Corp. (Nasdaq: NVDA), weighed in as well. It believes Intel will have more powerful transistors thanks to its new design.

But it was quick to say that its own chips are progressing along at a steady clip so that, "in terms of overall performance, we won't lag behind Intel." And it added that it's been working on similar transistors since 2003, and will have something ready to market soon enough.

Intel Inside or Outside?

It might seem as if Intel is spending too much money on a mere $7-billion market. But demand for mobile devices keeps growing at a steady clip.

The company therefore needs companies like Apple to adopts its architecture. Unfortunately, whether or not that happens is questionable.

For one thing, Arm has a powerful grip on that market. Intel has to produce a vastly superior product for companies to make the switch.

And its 3D chips' true capabilities still remain to be seen.

Intel especially has a tough nut to crack in Apple. Many people forget that Apple was one of Arm's original founding companies in 1990, along with Acorn Computers and VLSI Technology.

Every so often, rumors surface about it buying the company up again due to their closeness. And even if those rumors never actualize, the two still remain very close.

Unfortunately, Intel desperately needs that business from mobile phones and tablets. If it can't get it, it will be "Intel outside" and not "Intel inside" for this market.

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